Product Adoption and Profitability in an Industry with Malicious Market Players

'The Impact Of Malicious Agents On The Enterprise Software Industry, MIS Quarterly (2010, Vol. 34, No. 3, pp. 595-612)

30 Pages Posted: 16 Nov 2006 Last revised: 12 Jun 2014

See all articles by Michael Galbreth

Michael Galbreth

University of Tennessee, Knoxville - Haslam College of Business

Mikhael Shor

University of Connecticut Department of Economics

Date Written: November 1, 2006

Abstract

The development of the World Wide Web has created opportunities for malicious agents to attack information assets on an unprecedented scale. Harmful applications such as viruses and spyware can cause significant financial loss as well as other negative consequences. Software products with larger installed bases, and therefore more potential computers to attack, present more appealing targets for malicious agents. More appealing targets attract more attacks, and this increased vulnerability creates a negative externality for users of the product. This negative externality, and its impact on market share and profits, is the focus of this paper. We model a competitive environment in which software products are not only differentiated horizontally and vertically, but are also subject to a negative network effect driven by the presence of malicious market players. We find that the threat to consumers of malicious attacks can create perverse incentives for software firms, and can actually result in a preference on the part of these firms for malicious activity, as it enables increased profits. We also describe situations in which malicious activity allows a firm with an inferior product, which would otherwise not be a viable competitor, to operate profitably.

Keywords: information system security, network externalities, pricing of information

JEL Classification: L1, D43, L86, D62, M21

Suggested Citation

Galbreth, Michael and Shor, Mikhael, Product Adoption and Profitability in an Industry with Malicious Market Players (November 1, 2006). 'The Impact Of Malicious Agents On The Enterprise Software Industry, MIS Quarterly (2010, Vol. 34, No. 3, pp. 595-612) . Available at SSRN: https://ssrn.com/abstract=944995 or http://dx.doi.org/10.2139/ssrn.944995

Michael Galbreth (Contact Author)

University of Tennessee, Knoxville - Haslam College of Business ( email )

453 Haslam Business Building
Knoxville, TN 37996-4140
United States

Mikhael Shor

University of Connecticut Department of Economics ( email )

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

HOME PAGE: http://www.mikeshor.com/

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